Between the Hedges

Portfolio Manager's commentary on investing and trading in the U.S. financial markets

Late-Night Headlines
Bloomberg:

- U.S. Senate Majority Leader Harry Reid wouldn’t commit to passing a U.S. health-care overhaul this year, fueling concern among some Democrats that the debate may continue as the 2010 midterm elections approach. “We’re not going to be bound by any timelines,” Reid told reporters in Washington today after a closed-door meeting of all Senate Democrats. With all 435 House seats and 38 of the Senate’s 100 seats on the ballot next year, some Democrats see risks because opponents of the health plan would have additional time to mobilize and lawmakers might focus more on getting re-elected. “This is a battle against the clock,” said Senator Ron Wyden, an Oregon Democrat. “When you’re in an election year, everything is seen through a different prism.” The legislation, President Barack Obama’s top domestic priority, has been beset by delays in Congress because of Republican opposition and lack of unity among Democrats.

- Satellite photos indicate that Iran has increased production at a uranium mine, underscoring the need for wider UN inspections to determine whether the country is trying to build a nuclear weapon. Evidence of stepped-up activity at the Gchine mine, near the Persian Gulf coast city of Bandar Abbas, is seen in pictures obtained by Bloomberg News and the Washington-based New America Foundation, according to four nuclear analysts who examined the images. The mine could produce enough uranium to craft at least two atomic bombs a year, experts said.

- Euro-region banks are failing to heed the European Central Bank’s calls to lend and credit conditions may not return to levels seen before the financial crisis for three years, Daiwa Securities SMBC Europe Ltd. said. “The commercial banks’ priorities at the moment are focused on shoring up their capital, making sure they can cope with their current and future bad loans.”

- It’s too late, too timid, and comes with too many questions attached. Even so, the U.K. government deserves some credit for finally moving to break up a bloated, failed banking industry. It has done two things that were urgently needed. The banks that were bailed out at such huge cost to the taxpayer will be forced to become more competitive. And they will finally have to curb the bonuses they pay to senior staff. The question now is whether the British break-up plan will provide a template for zombie banks in the U.S., and all the other countries where banking systems were rescued by taxpayers. So far, U.S. President Barack Obama’s administration has dithered. But maybe the U.K.’s action will prompt the U.S. government to stop molly-coddling Wall Street and start protecting consumers and taxpayers instead.

- Walt Disney Co.(DIS) received Chinese government approval to build a theme park in Shanghai as it seeks to boost earnings at its second-largest division. The approval allows Disney and its Shanghai partners to move toward a final construction and operation agreement, the company said in a statement today.

Wall Street Journal:

- Republican Chris Christie, a former federal prosecutor, pulled out a win for the New Jersey governor's race against a deeply unpopular Democratic incumbent whom voters blamed for the state's high taxes and budget woes. The Associated Press called the race for Mr. Christie over incumbent Gov. Jon Corzine just after 10 p.m. With 71% of precincts reporting Tuesday night, Mr. Christie had 50% of the vote to Mr. Corzine's 44%.

- The International Energy Agency next week will make a "substantial" downward revision to its long-term forecast for global oil demand, a person familiar with the matter said, marking the second year running the group has slashed its view of the world's thirst for oil. The forecast of slower growth in oil demand puts the IEA increasingly in a camp of contrarians bucking the popular view that crude demand will grow briskly in a postrecession world. That view holds that long-term demand will grow at a fast clip because of rising emerging-market wealth and consumption in places like China and India. Last year, the IEA shaved 10 million barrels a day off its long-term forecast and projected consumption in 2030 would hit 106 million barrels a day, or about 25% above current levels. It isn't clear yet how that compares with the cuts expected in this year's forecast by the IEA. In the past, the IEA has been criticized for being too optimistic in past projections. Its current stance puts it in line with a growing list of industry analysts taking a more bearish view on future demand. "The rise in global oil consumption over the next 10 years could be minimal," says Mr. Verleger. If demand pessimists are correct, future increases in the price of crude could be damped. Various analyst estimates maintain that the roughly 2% a year average growth rate in world oil consumption seen earlier this decade -- the biggest reason for crude prices hitting a record $147 a barrel last year -- may turn out to be an anomaly and that annual growth in the neighborhood of 0.5% to 1% is more the norm. "There is a market assumption today that we will head back to the old days of rapid oil demand, but we think we are heading into new days," in which the growth in consumption will be more subdued, said Dan Yergin, chairman of IHS Cambridge Energy Research Associates. Deutsche Bank says global demand will peak by 2016 as consumption reaches a top level of around 90 million barrels a day, versus about 85 million barrels a day currently, due to efficiency gains and technology improvements over time in electric vehicles.

- White House Appears to Miscalculate Stimulus Jobs. Recipients' Reports on Use of Federal Funds Reveal Errors; Obama Administration Says It Plans Adjustment to Number. Recipients of the government grants and contracts appear to have made mistakes when estimating the number of jobs that have been saved or created, according to the Journal's review. Some recipients said they were confused by forms that asked how they spent the money. The Obama administration said Friday that spending from the $787 billion stimulus program had directly created or saved about 640,000 jobs through Sept. 30. Republicans challenged the claim, saying there was no concrete way to tally jobs "saved." Less than half the stimulus money has been spent so far. Ed DeSeve, the senior adviser to President Barack Obama on implementation of the stimulus plan, said Tuesday in a statement responding to questions from the Journal that the administration knew the reports were not "100 percent accurate" but that the plan was supposed "to create jobs, not count them."

- A closely watched deal that may help uncork the commercial-property debt market is picking up steam after being threatened by some queasiness by the Federal Reserve, according to people familiar with the matter. The Fed is sending signals that its concerns over the deal are easing, paving the way for the first sale of commercial-mortgage-backed securities, or CMBS, through a major rescue program called the Term Asset-Backed Securities Loan Facility, or TALF. The credit-starved real-estate industry has been hoping that the debt sale by shopping-center giant Developers Diversified Realty Corp. would lead to other CMBS sales. Developers Diversified announced in early October that it had obtained from Goldman Sachs Group Inc. a $400 million loan, which Developers Diversified and Goldman intended to be converted into a CMBS offering through the TALF program. But the Fed, mindful of protecting taxpayers' interest, had shown reservations about financing the deal because it involves just one borrower, according to the people with knowledge of the issue.

- Is it too early to buy condos in Florida? After all, the courts are jammed with foreclosure cases that are likely to keep large numbers of distressed properties flowing back onto the market for years. But Dizengoff Group, a family-owned commodity-trading and real estate company based in Israel, already is in the market. In September, it bought 118 condominium units in a complex called Portofino in Jensen Beach, Fla., for $6.75 million. That works out to $53 per square foot, compared with an average price of $204 when the units were offered by the developer in 2006, says Ronen Saban, the manager of Dizengoff’s office in Boca Raton, Fla. The company plans to rent out the units until the market recovers. “We have no intention of selling any units in the short term,” Mr. Saban says. Dizengoff is looking for more purchases in good locations and aims to buy at less than replacement cost.

- November is starting off with a bang for mergers and acquisitions dealmakers, with 41 announced U.S. deals worth $47.5 billion, according to Dealogic. This compares with November 2008 that had 575 deals worth $19.8 billion. Large Wall Street banks have been the biggest beneficiaries, but some boutique firms are also getting a slice of the action. Large banks such as Goldman Sachs Group Inc. and Barclays Capital and smaller firms such as Evercore Partners have advised on deals this month.

- The Securities and Exchange Commission has recruited Norm Champ, general counsel to a multibillion-dollar hedge fund, to lead its New York examinations group. For the past 10 years, Mr. Champ has run the compliance office for Chilton Investment Co., an adviser with $5 billion in assets under management.

- Lawmakers are adding sweeping exemptions to financial-regulation legislation that would benefit small businesses, a move that is irking some consumer groups and liberal lawmakers who contend that could compromise the effectiveness of the overhaul. Bills currently under consideration in the House exclude thousands of community banks from oversight by the proposed Consumer Financial Protection Agency, and transfer oversight of small investment advisers to state regulators. The latest move came Tuesday, when a House panel voted to exempt small public companies from complying with a provision of the 2002 Sarbanes-Oxley law, which was passed after a series of corporate scandals earlier this decade.

- Because so many people in their teens and early 20s are in this constant whir of socializing—accessible to each other every minute of the day via cellphone, instant messaging and social-networking Web sites—there are a host of new questions that need to be addressed in schools, in the workplace and at home. Chief among them: How much work can "hyper-socializing" students or employees really accomplish if they are holding multiple conversations with friends via text-messaging, or are obsessively checking Facebook?

CNBC.com:

- After looking at the action in transports, investors are wondering if Warren Buffett may have sent the bulls off to the races!

- Bailed-Out US Banks Preparing Pay Bonanza This Year: Study.

- Bitterness, anger and disbelief mixed with betrayal and even resignation are just some of the emotions boiling within Germany following Tuesday's shocking news that General Motors will scrap its sale of Opel. After months of protracted negotiations with a consortium led by Canadian auto parts maker Magna that finally led to GM approving a sale on Sept. 10 backed heavily by unions, the carmaker's board of directors reversed course and voted now simply to restructure Opel "in earnest" itself. GM confirmed the decision made by its 13-member board after a meeting of directors on Tuesday in Detroit, saying that improving business conditions and the strategic importance of Opel to its operations had prompted the move. Opel's labour leaders have agreed to contribute 265 million euros ($388 million) in annual savings as part of a much-needed restructuring plan, but made that contingent on a sale to Magna. "Unfortunately my suspicion seems to been confirmed that the decision to sell Opel to Magna was connected with the elections later that month in Germany," Opel's senior labour leader in Bochum, Rainer Einenkel, told Reuters. Chancellor Angela Merkel and key allies in her conservative party lobbied heavily in Magna's favour ahead of the parliamentary elections on Sept. 27, thinly veiling a threat that no German aid would flow should any other decision be taken.

- Did we witness the silencing of one of the greatest central bankers ever yesterday? Yesterday’s appearance on my show by former Federal Reserve Chairman Paul Volcker raised serious questions whether he is being silenced by the White House.

IBD:

- An ill wind is blowing some good McKesson's (MCK) way. First, San Francisco-based McKesson, the largest health care services company in the U.S., has the contract to distribute swine flu vaccine. Add to that the government incentive for development of health care electronic records, and the company is in good shape to outrun some 2008 setbacks.

CNNMoney.com:

- Mexico did not have an extreme economic makeover, but the global recession was enough to defeat China as the number one place for American assembly-for-export factories, or maquiladoras. "For many companies that want to export to the United States, like the maquiladoras, Mexico's exchange rate will be seen as a stable and permanent advantage and we are going to see much stronger investment flows associated to this industry," said Cesar Hernandez, general director of foreign trade at the Mexican Trade Ministry.

Newsweek:

- After Iran agreed to nuclear concessions on Oct. 1, President Obama said it was a "constructive beginning." But now, U.S. officials and Western diplomats say, Tehran is backtracking. This game of one step forward, two steps back is likely a result of Tehran's continuing power struggle, the officials say. It's also a standard Tehran ploy. "You move them, and then when they go back home, something happens there and they go back to a standstill," says the European diplomat. Secretary of State Hillary Clinton and other U.S. officials say they want to give the Iranians time to resolve internal disputes. Still, says the senior administration official, "it would seem they're trying to turn back the clock."

Politico:

- Republican gubernatorial candidates racked up major wins for the GOP in Virginia and New Jersey Tuesday night, as former Virginia Attorney General Bob McDonnell and New Jersey prosecutor Chris Christie claimed the governor's offices in both key states. As the GOP sought to send a warning shot to Democrats in Washington by scoring big in the 2009 off-year elections, McDonnell told an energetic crowd in Richmond that his victory represented the triumph of a broad new majority. "We had independents and Democrats that came over to support us," McDonnell said. "First and foremost, we are all Virginians and we are all Americans."

The Business Insider:

- Warren Buffett's giant $44 billion Burlington Northen deal (BNI) was conveniently advised by Goldman Sachs (GS) and Evercore partners. In case you forgot, Mr. Buffett has in-the-money warrants for Goldman Sachs shares. The Oracle really knows how to maximize the benefits he can wring from any situation. Combined with a Stanley Works and Black & Decker deal this week, Mr. Buffett's BNI deal has helped Goldman substantially close the gap between it and the #1 dealmaker this year, Morgan Stanley.

Reuters:

- A plurality of Americans see relations with China as the most important globally for the United States, a survey published on Tuesday showed, but more than half of those polled viewed China was an adversary. When asked to characterize China as either an "ally" or an "adversary," 56 percent characterized China as a foe, while only 33 put the country in the ally column, said Ipsos Public Affairs, which conducted the poll for Thomson Reuters.

- Warren Buffett's Berkshire Hathaway Inc (BRK/A) has joined Goldman Sachs Group Inc (GS) in a bid to buy $3 billion in tax credits from mortgage giant Fannie Mae, the Wall Street Journal's website reported, citing people familiar with the matter. On Sunday the Journal reported that Goldman, the largest and most profitable U.S. investment bank, is in talks to buy millions of dollars of tax credits from Fannie Mae. The Treasury Department, which controls Fannie Mae and Freddie Mac after pouring $100 million into the housing-finance giants, may block the sale on the grounds that it wouldn't benefit taxpayers, WSJ said. The sales would come as the public rails against government moves that aid banking giants, which are preparing to lavish big bonuses about a year after receiving trillions in taxpayer rescue funds. Goldman, which received federal bailout money last fall, in particular has come under fire for generating out-sized profits and preparing record bonuses as the economy continues to struggle. Buffett injected $9 billion into Goldman last fall through purchases of preferred stock.

Financial Times:

- When I asked a Chinese academic last December what the main themes of 2009 would be, he named two big problems – the economy and Copenhagen. The economy was pretty obvious. At the time we spoke, there were dark warnings about millions of disgruntled workers roaming the countryside. On Copenhagen, his worry was that as the world’s largest emitter of carbon, China would become the lightning rod for global anxiety about climate change. If the December summit in Denmark collapsed without agreement, he pointed out, the inevitable demonisation of China could begin to threaten its development. Almost a year later, both concerns have faded. China’s economy is growing faster than most, and some factories in the south are already complaining about a shortage of workers. In the frantic round of talks ahead of Copenhagen, meanwhile, China’s negotiators can take comfort from the fact that the real pressure is being felt in other capitals. In truth, China has played its climate cards beautifully. Beijing has been helped by events elsewhere. In its early days, the Obama administration hoped to forge a close partnership on climate change with China that would allow it to nudge Beijing into important new commitments. But with its climate-change bill still languishing in Congress, Washington has little leverage. Todd Stern, US special envoy for climate change, has admitted the two countries will not sign any substantial agreement when President Barack Obama visits Beijing later this month. China has also been quite happy for India to strike a more belligerent tone in climate talks – a role often played by Jairam Ramesh, the Indian environment minister. Both governments feel strongly that the onus of dealing with global warming lies with the rich world. Last week they even signed an agreement to co-ordinate climate-change efforts, which will help them to take a united stance in Copenhagen. But it suits China for India to take a harder line in public. Some activists fear that ChinaBeijing is currently putting in place the next five-year plan for 2011-15 and the word is that local governments have been resisting another 20 per cent improvement in energy efficiency. Observers speculate that the government will instead announce a target to reduce carbon intensity by 20 per cent – with about 13-15 per cent coming from better energy efficiency and the rest from more renewable energy and reforestation projects. Such a reduction in energy intensity is still a big improvement. But it is easy to see the line of attack that other governments might take if such a policy were announced. They could say that under the guise of a new carbon-intensity target, Beijing was actually reducing pressure on its coal-addicted steel mills and power plants to use energy more efficiently. Copenhagen could still provide some uncomfortable moments for Beijing. could start to relax its policies.

- IntercontinentalExchange (ICE), the electronic futures exchange group, said on Tuesday that nearly all new credit default swap contracts would be cleared centrally by the end of the month, fulfilling a key demand from regulators for reducing risk in the over-the-counter derivatives market. ICE has taken a strong lead among exchanges in the race to clear credit default swaps, the OTC contracts widely blamed for aggravating the financial crisis, prompting Congress to demand that most be cleared centrally in order to guarantee the creditworthiness of both sides.

TimesOnline:

- A “supergiant” oilfield under the streets of suburban Baghdad is being prepared to go under the hammer in an Iraqi government auction next month. The East Baghdad oilfield is believed to contain 8.1 billion barrels of crude — more than twice the level of reserves left in the North Sea. It is one of ten oilfields and one gasfield that the Iraqi Government is likely to offer in a second round of bidding from December 11.

Business Standard:
- Cement prices have witnessed the greatest fall of about 5-10 per cent across India in the last two months. Moreover, in western and southern India, where a large amount of new stock is still arriving, the non-trade prices have been cut by 20-30 per cent to Rs 160-180 a bag.

Yomiuri:

- Toyota Motor Corp. raised its global production plan for the current fiscal year to 7 million vehicles from a previous target of 6.67 million.

Macao Daily News:

- Macau’s casino revenue rose 42% in October from a year earlier to $1.25 billion, citing Portuguese news agency Lusa.

Late Buy/Sell Recommendations
Citigroup:

- Reiterated Buy on (AMZN), target $140.

- Reiterated Buy on (AMT), target $48.

Night Trading
Asian Indices are +.25% to +1.75% on average.

Asia Ex-Japan Inv Grade CDS Index 120.50 +3.0 basis points.
S&P 500 futures +.33%.
NASDAQ 100 futures +.22%.

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Earnings of Note
Company/EPS Estimate
- (BHI)/.35

- (FWLT)/.63

- (WRC)/.76

- (DVN)/.91

- (MMC)/.26

- (BDX)/1.25

- (PHM)/-.83

- (LIZ)/-.22

- (TWX)/.53

- (WCG)/.67

- (CMCSA)/.25

- (XTO)/.84

- (NWSA)/.18

- (ALL)/1.02

- (MCHP)/.25

- (QCOM)/.52

- (MUR)/.99

- (WFMI)/.18

- (PRU)/1.33

- (CSCO)/.31

- (CECO)/.17

- (N)/.00

- (THQI)/-.49

Economic Releases

8:15 am EST

- ADM Employment Change for October is estimated at -198K versus -254K in September.

10:00 am EST:

- ISM Non-Manufacturing for October is estimated to rise to 51.5 versus 50.9 in September.

2:15 pm EST:

- The FOMC is expected to leave the benchmark fed funds rate at .25%.

Upcoming Splits
- None of Note

Other Potential Market Movers
- The weekly MBA mortgage applications report, Challenger Job Cuts report, BOJ Minutes, Keefe Bruyette Brokerage & Market Structure Conference, Goldman Sachs Industrial Conference and the Oppenheimer Health Care Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by financial and technology shares in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Posted by: Gary / 6:52 PM

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Tuesday, November 03, 2009

Wednesday Watch